I’ve been reminded twice in the last week about how important planning is to business, and how too many people misunderstand what a plan is supposed to do. My reminders came from two different people doing startups. Neither of them needs a business plan to show to investors. Both need business plans to figure out what steps to take and when, and how much money they need.
This reminds me of these important principles of business planning that everybody should keep in mind.
1. Form follows function
You’re probably aware of this as a general principle of good business and a lot of other things. It also applies to business planning. What this means in practice is that a business plan is only the formal, carefully edited and produced document that you fear and dread when it’s going to be submitted to banks or investors as part of a process of raising money.
Most of the time, as in the case of both entrepreneurs I dealt with recently, a business plan isn’t formal, isn’t carefully edited, and isn’t produced like a document. Instead, it’s a collection of related thoughts, lists, tasks, dates, and basic business numbers. It’s not for outsiders to read, but for you, the entrepreneur, to help you sort things through and organize what to do. And it doesn’t matter what form it’s in, as long as it helps the business figure out the next steps.
Those business pitches, the summary memos, the elevator speeches you read about? Those are not instead of the business plan; they are outputs of the business plan.
2. It’s about management
The objective of the business plan is better management. It’s knowing what to do. Too often, people tend to think the objective of the business plan it to present the business to outsiders, as if it were a sales tool to summarize the business to banks or investors. Instead, it’s a tool to help with the management.
For example, a good strategy summary in a business plan sets priorities and focus. It doesn’t have to be brilliant; it has to be practical. It defines a target market, market needs, and a product offering to match those needs. It establishes what’s most important and – frequently vital – what isn’t important.
And, as an additional example, the nuts and bolts of the business plan ought to be about concrete specific tasks, people, and resources. The plan should define milestones, business activities, and specify responsible parties, start dates, ending dates, and deadlines. The plan should establish how performance will be measured and the numerical goals. And the plan should project basic numbers, including sales, cost of sales, expenses, and cash flow.
The easiest way to test a plan for how well it does with management is to ask yourself how you’ll know whether the business is on track or not. If the plan doesn’t have a lot of specifics that can be measured, then it won’t help with ongoing management. You have to be able to use the plan to check the numbers and results, review, revise, and then correct the plan. It’s a tool for management, not an end in itself.
3. It’s not accounting
Portions of a useful business plan look a lot like accounting statements. For example, a projected income looks like an income statement, and a projected cash flow looks like an actual cash flow statement.
However, the huge difference is that planning is about the future, while accounting statements are about the past. The future is an educated guess that is valuable for how it builds on assumptions, how it connects the spending to the revenue, and how it helps with managing the business later because of plan-vs.-actual analysis. The past is a report on a database of actual transactions.
Because of this vital difference, accounting has to be an accurate report on an actual collection of transactions, but planning has to have simplifying assumptions and aggregated numbers. For example, depreciation in an accounting statement is a report of a detailed database of assets, purchase price and purchase dates, accumulated depreciation, and so forth. Depreciation in a business plan, on the other hand, is an educated guess of the total.
The good news is that keeping this difference in mind makes the planning projections easier. You don’t have to invent a fictional reality in detailed transactions. Instead, you create educated guesses of major categories.
Conclusion: all three of these basic principles serve as a reminder of what business planning is supposed to be, what it is supposed to do, and how it can help you in your business.